Wash sale risk rises with meme stock comeback

As meme stocks reappear, traders could face a surprise tax bill from the wash sale rule.

Wash Sale Pitfall Hits Meme Stock Comeback

At the height of the pandemic meme stock craze, one 50-something investor rode the wave with gains of more than $7 million and losses just over that amount, hoping the losses would offset the gains for tax purposes. It did not. The IRS flagged more than half a million dollars of his losses as wash sales, leaving him with a six-figure tax bill for 2021. The case, kept anonymous, underscores a risk that can catch even careful traders when meme stocks surge again.

Today, commission-free trading, mobile apps, and social media-driven tips have widened the pool of people willing to trade quickly. A World Economic Forum survey done with Boston Consulting Group and Robinhood found that 57% of Gen Z and Millennial investors consider advice from social media or online communities important, while app-based trading has grown at roughly 20% a year since 2016. That environment increases the chance of wash sales across accounts and across years. Crypto is not currently covered by wash sale rules, but there are hints that future rules could change this area. You can still find opportunities to harvest losses without triggering the rule, but the clock reminders and record-keeping are essential.

The wash sale rule acts as a quiet brake on rapid trading fueled by memes and dashboards. It reminds readers that tax planning follows market thrills and that losses are not automatically deductible if you replace the security within 30 days. The history is long (passed in 1921, with the “substantially identical” test added later in 1954), yet the consequences remain very concrete for individual investors. The piece also shows how the current trading landscape—micro-second trades, margin use, and cross-account activity—amplifies the risk of disallowed losses.

Looking ahead, the mix of accessible trading, social media influence, and evolving tax rules suggests a need for better guidance. Investors should slow down, keep thorough records, and consider professional tax advice before chasing short-term gains. The bottom line: memes can be fun, but the tax bill can be unforgiving.

Highlights

Tax truth remains simple: profits fade, but the tax bill endures.